Spending on New Channels Lowers 21st Century Fox Net

Twenty-First Century Fox reported lower quarterly earnings as it invested in new assets including the cable channels Fox Sports 1 and FXX.

Net income dropped to $1.255 billion, or 33 cents a share, in the company's fiscal first quarter from $2.287 billion, or 94 cents a share a year ago.

Revenue increased 18% to 7.06 billion. The company said about half the revenue increase came from growth at its cable network programming, filmed entertainment and television segments, while the rest relates to including Sky Deutschland revenue in its direct broadcasting satellite segment.

"In our first quarter as 21st Century Fox, we delivered strong revenue increases across all of our businesses as well as growth in OIBDA even as we made significant investment in our channels business, and faced a difficult film comparison and currency headwinds," Chairman and CEO Rupert Murdoch said in a statement. "The investment we are making, including the launch of FXX and Fox Sports 1, will drive future sustained growth toward our stated 2016 target of $9 billion of OIBDA and beyond."

During the company's earnings call with analysts, John Nallen, senior VP and CFO, said that launching the new channels had a $50 million impact on earnings. The added costs were expected. Nallen said the company remains on track to achieve its guidance for full year performance, with a high single to low double digit growth rate from fiscal 2013's EBITDA of $6.2 billion.

Operating income at 21st Century Fox's cable network programming unit slipped to $991 million in the quarter from $1.02 billion a year ago. Income was hurt by foreign exchange rate changes and by programming and marketing expenses at FX Networks. Revenue for the cable programming unit rose 12% to $2.8 billion, but because of the launch of new channels such as Fox Sports 1 and FXX, expenses were up 22%.

Advertising revenue at the U.S. cable channels grew 6%, driven by double-digit growth at FX Networks, the regional sports network and National Geographic Channels. Ad revenues were down at Fox News Channel because of the comparison to the 2012 election season.

International ad revenue was up 21%.

President and CEO Chase Carey told analysts the successful launch of Fox Sports 1 and FXX was the highlight of the quarter, Distribution exceeded targets, while programming is "clearly a work in progress," he said.

Revenues and profit contributions at Fox's television production units were up year-over-year, primarily due to Modern Family entering domestic syndication and the sale of the first two seasons of New Girl to Netflix, the company said.

Operating income at the television unit, which includes the Fox broadcast network, rose to $231 million from $178 million. Revenues for the television segment grew to $1.05 billion from $972 million a year ago. The company said the increases were driven by a doubling of retransmission consent revenue. The company said ad revenue was "consistent," with higher rates and increased sports ratings offsetting the impact of lower entertainment ratings, particularly declines on The X Factor. Political advertising was lower at the TV stations.

Carey called the broadcast results mixed. "Sports has been a strength. We're excited about the start of our new drama Sleepy Hollow and believe a few of our new comedies show promise," he said. On the other hand, "some of the returning shows have been disappointing," he said, adding, "it's still early, even shows like X Factor, it's been in disappointing today, but we'll see where it comes back out of the World Series preemptions."

The advertising market is solid, according to Carey. "Scatter is being sold at double-digit pricing to the upfront for broadcast and scatter pricing for cable networks like FX is even stronger. The local ad market finished its September quarter up mid-single-digits excluding politicals and Olympics and is also up a bit excluding politicals for the December quarter," he said.

Asked about Hulu, he said he would let the joint-venture's management, led by new CEO Mike Hopkins, previously a senior Fox executive, speak for itself. "Obviously we believe in it. We've made a significant investment in it going forward," he said. "We think there are real opportunities in the digital space to both create something that you can, it can be a real positive for us, for sort of the existing distribution ecosystem, as well as our platform that competes with in some ways with Netflix and the likes of the world in creating an alternative in that digital space."